Whether you're investing by yourself or you have a team of investors that provide you with capital to invest, there are times when you might come up a bit short. If you need additional funds to either stretch and make an investment happen or to enable you to purchase more properties, hard money lending can be a powerful tool.
Hard money lenders primarily look at the asset you're buying instead of focusing on a myriad of details that ultimately don't have a lot to do with the deal. Typically, if you are able to put anywhere from 35 to 50 percent down, they will bridge the gap and provide you with debt capital very quickly.
While hard money loans may carry slightly higher interest rates than traditional financing, they bring important advantages when you're looking to jump start a project. These can include:
Hard Money Lending Benefit #1: Very fast approval times.
Once you have an appraisal in place, it's possible to get a loan from application to funding in a matter of days. Even slower moving loans usually take no more than a few weeks.
Hard Money Lending Benefit #2: Easier qualification.
In addition to the opportunity to qualify for a loan without it being based on a credit score, some private lenders are particularly well-suited to help groups that have large numbers of investors that would otherwise be too unwieldy to submit through a bank lending process.
Hard Money Lending Benefit #3: Stream-lined underwriting.
While it is true that many hard money lenders require relatively high down payments relative to the loan amount, they also offer a valuable alternative. Many lenders underwrite a loan looking at the cash flow of the property relative to the interest payments. For instance, a bank looks at DTI, or debt to income of a borrower, but more and more hard money lenders are looking at DSCR, or debt-service coverage ratio, which is the cash flow of the property relative to the interest expense. They will look primarily at the equity value of the property and how much equity cushion is buffering their capital. They will also look to the borrower’s credit score and their income. So if your underlying collateral is strong, chances are you will have no problem securing a hard money loan for a quick close on your investment property.
Hard Money Lending Benefit #4: No limits.
Some lenders impose arbitrary limits on how many loans an investor can hold. Most hard money lenders look at each property in isolation. This makes them particularly useful for active investors that carry both large quantities of properties and of debt.